Sample Deliverable Due Diligence on Strategic Tie-up ...

Due Diligence on Strategic Tie-up between Ellerines Holdings and African Bank

Sample Deliverable

2

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The recovery in South African economy has been tempered by increasing inflation rates and a depreciating Rand resulting in falling consumer confidence

GDP and Per Capita Income (% Change)

Note: * FNB/BER Consumer Confidence Index (First National Bank/Bureau for Economic Research)

Source: IMF; Stats SA; South African Reserve Bank; news articles; Bloomberg

Inflation Rate (%)

Consumer Confidence Index*

5.5%

3.6%

-1.5%

2.9% 3.1%3.6%

4.0% 3.8% 3.6%

3.4%

2.5%

-2.6%

1.8% 1.9%2.4%

2.7% 2.6% 2.3%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

2007 2008 2009 2010 2011e 2012e 2013e 2014e 2015e

Ch

an

ge

GDP Per Capita Income

3.7%

3.7%

4.1%

4.2%4.6%

5.0%

5.3% 5.3%

5.7%

6.0%

6.1%

6.1%

6.3%

6.1%

3%

3.5%

4%

4.5%

5%

5.5%

6%

6.5%

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12

23.0

21.1

18.0

22.0

12.0

-6.0

-1.0

-4.0

1.0

4.0

1.0

6.0

15.0

14.0

15.0

14.0

9.0

11.0

4.0

5.0

5.0

-10

-5

0

5

10

15

20

25

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2007 2008 2009 2010 2011 2012

ZAR Vs. US$, Euro and JPY (Indexed to 100)

70

80

90

100

110

Jan-11 May-11 Sep-11 Jan-12

ZAR/EUR ZAR/USD ZAR/JPY

South Africa’s GDP growth has been largely driven by strong domestic

demand and consumption expenditure

The Rand depreciated by more than 10% against the currencies of its

major trading partners

Inflation has been steadily increasing since 2011 due to increasing food

and fuel prices

Consumer Confidence fell sharply in Q3 2011, but has recovered

slightly, suggesting improving consumer sentiment

Sample Only- Disguised & Abridged

3


Productivity Average Wage

Low High (Six times that of a Chinese worker)

High Low

Source: World Economic Forum; Reuters; Bloomberg; Businessweek

Temporary

Workers

Arbitration

and Dispute

Settlement

• Temporary employment is limited to

genuine temporary work that does not

exceed six months. Any employee who is

employed for more than 6 months will be

treated as a permanent employee with

corresponding benefits

• Additional protection is extended to persons

employed in temporary work and who earn

below an earnings threshold (set at the

Basic Conditions of Employment Act

threshold of R172, 000 per annum)

The South African labour market is regarded as rigid and expensive, withissues ranging from wage determination to general employer relations

• New amendments that deal with the

Commission for Conciliation Mediation and

Arbitration (“CCMA”) and its ability to settle

labour disputes

– These also include the provision to

exclude high-income earners from

bringing unfair dismissal claims to the

CCMA

Global Competitiveness Report 2011-12: South Africa

139

138

138

50

Hiring and firing practices

Flexibility in wage determination bycompanies

Labour-employer relations

Overall Rank

• South Africa performed reasonably well on the Global Competitiveness

Scale, finishing 50th among 146 countries and 2nd among BRIC

countries

• However, the overall ranking is not truly reflective of the structural

issues in the South African labour market, its high ranking contributed

primarily by its economic strength, strong financial markets, business

sophistication and other parameters

– South Africa was ranked lowly on labour-employer relationships

(138th), flexibility in wage determination by private companies

(138th) and hiring and firing practices(139th)

Key Provisions of the Labour Relations Amendment Bill 2012

Comparison of South African and Chinese Workers

Labour in South Africa

• High cost of labour: The recently (1Q12) proposed amendments

in the Labour Relations Bill outline that temporary employment

cannot exceed a period of six months and will have to be

converted to permanent employment after six months

– This may lead to an increase in the cost of labour as

permanent employees are eligible for additional benefits like

medical aid, pension funds and other allowances

• Rigid labour laws: On a global scale, the labour market in South

Africa is ranked low due to structural issues in flexibility to

determine wages and general employer-employee relations


4


Production Agencies

Agency Locations Key Competency/

Specialization

Service by Media Type Exposure to South African Advertisers

Outdoor

(Print Only)

Indoor

(Video/Audio/Print)

Retail/CP1 Furniture Banking

• Johannesburg • Electronic media

• Johannesburg • Visual effects and animation

• Johannesburg • Electronic media

• Johannesburg • Motion media

• Johannesburg

• Cape Town• Electronic media

• Centurion • Electronic media

• Johannesburg • Graphic design specialist

• Cape Town

• Durban

• Johannesburg

• End-to-end print media

solutions

• Johannesburg• Outdoor banners

• Eco-friendly billboards

• Sandton• 3D animation and visual

effects

• Randburg • Post production solutions

Typical production agencies in South Africa appear niche players with some exposure to the consumer products and financial services sector

Note: 1) CP implies consumer products


5


NVP handles all aspects of the production process

Source: NVP website; “The Annual Advertising 2011/12 Report”, Future Publishing House, 2011; news article

• NVP is a production company handling all aspects of the production process

from pre-production through to the final product

• The company specializes in high-end visual effects; animation; editing; final

mix; and scripting for the television and advertising industry

• New Vision is a part of the media conglomerate, New Vision Media

Business Description

• Headquarters: Johannesburg, South Africa

• Ownership: New Vision Media,New Vision

Holding having 60% stake in NVP

(NVH 60%, G Swanepoel 34%,

Others 6%)

• Employees: Permanent: 17

Freelancers: 32

• Website: www.nvpictures.co.za

Key Facts

• Damien Brown, CEO

• Hans Sedgwick, Joint Managing Director

• Graeme Swanepoel, Film Director & head of Creative• Average Cost of Commercial: R350,000

• Key Agency Worked With: Metroplitan Republic, Jupiter Drawing

Room

• Key Directors Worked With: Rick Leed, Producer of Home in

Provments, Dr 90210, What a woman

wants with Mel Gibson

• Biggest Commercials: MTN Samas, Merc, Citroën, Edgars

Key Achievements

• NVP was the first company in the world commissioned to produce content

for mobile

• It was the first production company in South Africa to produce webisodes on

behalf of a corporate

Featured Customers/Advertisers

Key Executives

Operating Highlights


6


Advertising Agencies

Agency Locations Agency Type Revenue

(R mn)

No. of

employees

Revenue per

employee

(R)

Number

of Clients

Segmentation of Activities(1)

• Cape Town

• Johannesburg

• Integrated

communication

group

~ 42 ~ 100 420,000 19

• Johannesburg

• Cape Town

• Durban

• Full service

communication

agency

N.A. 724 N.A. 136

• Johannesburg• Full through-the-

line agencyN.A. 77 N.A. 11 N.A.

• Johannesburg

• Cape Town

• Durban

• Network of

specialist partners

worldwide

N.A. 623 N.A. 300+

• Sandton

• Integrated

communication

agency

30 52 576,923 16

• Johannesburg

• Cape Town

• Durban

• Brand

communication

specialist

40 296 135,135 77 N.A.

• Johannesburg • N.A. N.A. N.A. N.A. N.A. N.A.

• Cape Town

• Johannesburg

• Integrated

communication

agency

155 218 711,009 14

Most established advertising agencies in South Arica have created integrated solutions with Ogilvy and Draftfcb dominating the landscape

65%

35% Above-the-line

Below-the-line

60%

40%Above-the-line

Below-the-line

70%

30% Above-the-line

Below-the-line

60%25%

15%Above-the-line

Below-the-line

Brand Design

60%

40% Above-the-line

Below-the-line

Note: 1) Above the line advertising targets mass audiences using radio, print, TV, Out-of-home to carry the message. Below the line advertising

targets a limited or niche group and uses direct and focused communication to carry the message


7


Operating through eight subsidiaries, King James offers integrated marketing & advertising solutions to its clients

Source: King James website; LinkedIn; “The Annual Advertising 2011/12 Report”, Future Publishing House, 2011

• Founded: 1998

• Headquarters: Cape Town, South Africa

• Ownership: King James Group (100% local

ownership, 26% black owned)

• Revenues: ~ R42 million

• Employees: ~ 100

• Website: www.kingjames.co.za

• King James Group is a South Africa based advertising and communications

company. Its offices are located at Cape Town and Johannesburg

• It provides solutions related to the brand strategy, design, promotional

marketing, CRM and mnemonic (web development)

Business Description

Operating Divisions

Key Services/SolutionsCompany

• RSVP is the design and promotion arm of King

James Group

• Atmosphere Communications is a corporate and

brand communications consultancy based in Cape

Town and Johannesburg

• Proof is a digital retouching and proofing studio

• One Small Seed is a South African media group that

consists of a quarterly print magazine, a blog, a

social network, online TV, a photography

publication, and a production company

• Punk is a provider of interactive marketing, strategy,

product development, design and advertising

services

• Hammer Live Brands executes strategically aligned

nationwide activations on behalf of premium global

brands

• Dare is a media strategy agency that provides tailor-

made channel solutions

• Society creates online and offline communities and

conversations for brands

65%

35% Above-the-line

Below-the-line

• James Barty, Group MD

• Alistair King, Group Creative Director

• Charles Matterson, MD

• Bruce Wright, Creative Director

• Agency Type: Integrated Communications Group

• Core Agency Discipline: Creative Idea Generation

• Preferred Media Agencies: Dare Media (for Strategy/Planning); The

MediaShop (for Buying)

• Number of Clients: 19

• Accounts Won in 2011: Nashua; Galaxy Jewelers; Diageo

Innovation Project

• Segmentation of Time Devoted

on Advertisement:

Featured Customers/Advertisers

Operating Highlights

Key Facts

Key Executives


8


Increased allocation of marketing expenses towards Banking Unitactivities presents an opportunity for client to support ABIL further

Source: Company reports

Marketing Expenses Split by Business Segment

• Bottom Level: New and innovative product development like credit led insurance, introduction of ‘Interest Buster’ for credit card, introduction of consolidation loans, payment break etc.

• Middle Level: Changed the office layout to make it more convenient for the customers. Opened new stores, kiosks (111) and carve-outs (129) and used EHL stores to distribute credit cards

Introducing new

and innovative

products and

services

Improving

customer reach –

physical mediums

• Top Level: Introduced new channels of marketing the product and creating brand image

– The group organized 21 roadshows in 2011 to improve its brand image

– Set up a new and user friendly front end of the group’s website

– Introduced new services such as INSECONDS, loan-by-phone, mobile services and call centers

New

marketing

channels

23.3%

16.8%

12.2%

15.1%

76.7%

83.2%

87.8%

84.9%

0% 20% 40% 60% 80% 100%

2011

2010

2009

2008

African Bank EHL

Although, the retail unit has traditionally received more attention, ABIL started tweaking its marketing strategy for the African Bank unit in 2011

2008 2009 2010 2011

Marketing expenses

(R mn)168 189 161 176

Y-o-Y Growth - 12.5% (14.8%) 9.3%

Marketing expenses as

% revenue1.8% 1.6% 1.3% 1.2%

Revenue per unit of

marketing expense (R)56 61 79 87

Y-o-Y Growth - 9.2% 29.2% 9.9%

Marketing Expenses & Revenue

African Bank’s share of the marketing spend has almost doubled in the

last two years


9


Segmentation1

Branding2

Product & Pricing3

Promotion4

• Re-defined its market segments

on the basis of customer needs

• Besides income, key parameters

used in this exercise were

lifestyle, tastes and preferences

• This was done to determine

brand portfolios and positioning

strategy

• Various brands were mapped to

each target segment

• EHL consolidated its previous

portfolio of 13 brands into six

brands and mapped them to

seven identified target segments

• Established unique identity of

each brand

• Conducts regular category

reviews to refresh range

offerings by brand

• This led to avoidance of product

duplication across brands

• EHL focused on:

– Product differentiation

– New product development

– Enhancement of quality

– Offering products at

competitive prices

• Revamped its merchandise

strategy to avoid “out of stock”

situation

• Entered into strategic

partnerships to provide products

from renowned global furniture

manufacturers

• EHL focused on aggressive

promotion through:

– Print media

– Social media

– Digital Marketing media

• Undertook new initiatives for in-

store promotions and better

customer service

• Innovated credit offerings and

made them available at low cost

to customers

Source: ABIL company presentations, 2008-2011

Brand Proliferation, No product

differentiation across brands

Overlapping segments Poor Quality, lack of innovation,

formula pricing

Ineffective promotion, lack of

analytics in focused promotions

Issues

Solutions

Ellerine’s marketing strategy was re-structured to rationalise its product portfolio and achieve cost savings

Since its acquisition by ABIL in 2008, EHL has focused on bringing a number of changes in its marketing strategy. Marketing audits have taken place

annually, leading to a number of changes over the last four years. These included introduction of new market segmentation, development of new

products, product differentiation and provision of credit at low cost


10


Condensing the brand portfolio to 6 core brands enabled targeting of specific customer segments with a distinct value proposition

Note: 1) Data as on September 30, 2011

Source: “The Annual Advertising 2011/12 Report”, Future Publishing House, 2011

Brand

47%

11%

9%

7%

6%

21%

Overview

Share in

Merchandise

Sales1

No. of

stores1

Key

Products

Customer

Value

Proposition

Target Customer

Segment

Key

Advertising

Channels

• EHL has four brand names under this segment:

Ellerines, Town Talk, Furncity and Savells Fairdeal 627

• Household

Furniture

• Electrical

appliances

• Low cost

products

at credit

• Lower income

group and

mass market

• Print

• TV

• In-store

• Database

marketing

• Radio

• Strived to build a reputation for being a caring store

that offers the right product choice in a friendly

environment

217

• Household

Furniture

• Electrical

appliances

• Value for

money

• Middle class –

conservative

and typically

suburban

• Print

• TV

• In-store

• Radio

• Developed a reputation for its distinctive and

exclusive furniture

• During the last year, it incorporated McNamee’s

and Glicks furnishers into the fold, expanding the

product base

78• Household

Furniture

• Distinctive

Looks

• Status-

conscious

customer

• Print

• TV

• In-store

• Direct Mail

• Targets young people with bright personalities and

an interest in fashion. They are often techno-savvy,

sociable, and go-getters with great aspirations

• Uses a blend of traditional media, social media and

multimedia to communicate with each group

36

• Household

Furniture

• Electrical

appliances

• Affordable

Fashion

• Middle class

with a slightly

higher socio-

economic level

• Print

• Radio

• In-store

• It offers local designs, international decor items

and customised furniture

• Established a flagship store on Johannesburg’s

William Nicol Drive with a coffee shop and free Wi-

Fi

32

• Decor

furniture

• Household

accessories

• Living the

Lifestyle

• Higher income

group

• Print

• Expos

• In-store

• Brand originally focused on selling mattresses over

the phone but has now shifted to selling in-store

• Positioning focus is to offer products at such low

prices that small stores find it difficult to compete

• Provides 90-day comfort exchange policy

69 • Beds

• Best

brands at

best price

• Middle to

higher income

groups

• Print

• TV

• In-store

• Radio


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Note: 1) Total excludes 1,166 staff employed at central departments; 2) For advertising spend by companies, period considered is as follows: EHL and Lewis data is

for period October 2010 to September 2011; JD Group data is for year ending August 2011

Source: “African Bank Investments Ltd.”, HSBC, November 22, 2011; company annual reports; The Annual Advertising 2011/12 Report

Ellerine Holdings JD Group -

Furniture Retail

Lewis Group

Particulars of Furniture

Retail Segment

Ellerines Beares Furniture

City

Green &

Richards

Dial-a-

bed

Wetherlys EHL Retail

Total

Number of Brands NA NA NA NA NA NA 6 8 3

Number of stores 627 217 36 78 69 32 1,059 988 582

Retail Trading Space (m2) 351,754 152,354 62,681 61,121 19,836 55,056 702,799 496,372 231,184

Merchandise sales (R

million)2,191 994 401 513 300 311 4,710 4,963 2,290

Sales growth 14% 5% -15% -1% 0 -5% 5% 7% 12%

Sales/m2 6,299 6,524 6,398 8,393 15,124 5,649 6,702 9,999 9,907

Credit mix of sales 83% 69% 55% 53% 7% 0 64% 64.1% 71.4%

Employees 4,990 2,101 532 718 269 467 9,1371 9,233 6,842

Sales/Employee (R'000) 439 473 677 714 1,115 666 515* 538 335

Marketing Spend as % of

Revenue22.87% 2.88% 3.67%

Marketing Strategy• Target Group: The combination of 6 brands targets all segments

• Marketing Channels: Print, television, social and digital marketing

• Target Group:

Primarily targets the

mass-middle

market with a

secondary focus on

the entry- and top-

end market

segments

• Marketing

Channels: Monthly

catalogues, special

offers, event-driven

pamphlets, in-store,

club magazines

• Target Group:

Lower and middle

income groups

• Marketing

Channels:

Targeted

marketing

campaigns,

brochure

distribution, in-

store promotions,

customer loyalty

through

membership to

Lewis Club

EHL is also trying to increase its sales density, which lags its peers, by closing redundant stores & using trading areas more efficiently


12


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